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The Globalization Monster in the Closet

Can service-industry firms win over powerful global competition?

With an all-encompassing title like Globalization, you might expect the book by authors Bruce Greenwald and Judd Kahn to be a heavy read -- perhaps focusing on global warming or the current bleak financial crisis. But when the authors define globalization in the book's subtitle as "the irrational fear that someone in China will take your job," you quickly figure out there's something Foolish afoot.

Indeed, the authors' thesis is much more focused than the title suggests: They seek to dispel much of the conventional wisdom about globalization. As Greenwald explained during a recent visit to Fool HQ, the book offers insights into economic megatrends and suggests how businesses and investors can profit in an era of intense worldwide competition.

The conventional wisdom surrounding globalization is that it is the dominant force in fashioning the world's economies. Similarly, many assume that businesses must globalize or die, and that the process of economic integration will continue on inexorably. In the process of dispelling these simplistic myths of economic globalization, Greenwald and Kahn present an alternative history based on facts, highlighting the power of globalization as well as its limitations. Refreshingly, their conclusions cut across traditional ideological chasms.

Globalization: job-destroyer?Perhaps the biggest bete noire of the anti-globalization crowd is the fear that globalization entails the permanent loss of jobs. To counter this argument, the authors present an alternate view on the history of economic growth: that the United States has moved from emphasizing agriculture (pre-1920), through differentiated manufacturing (1920s-1970s), to a service-based economy.

Along the way, the authors present evidence that most of the lost agricultural and manufacturing jobs were due primarily to increased productivity through technology, not globalization. But a service economy is a different beast.

Invest in service, or how to survive globalizationWhereas the production of many goods can be automated and therefore outsourced, the authors suggest, it's hard to outsource most service industries. Typically, services must be performed according to local tastes and preferences, and many by definition simply can't be done elsewhere. The term American car has almost no meaning, what with Ford(NYSE:F) and GM(NYSE:GM) importing a substantial number of components. But have you ever had an outsourced meal at a local restaurant or an outsourced haircut?

Therefore, Greenwald and Kahn posit, a service-based U.S. economy is in a much better position than manufacturing-dominated countries such as Japan and Germany, which must continually fight against lower-cost foreign rivals. In other words, for the foreseeable future, globalization does not appear to be a bugaboo for the U.S. economy as a whole. Nevertheless, it's probably still sayonara to Ford and GM.

The insight that service economies resist outsourcing leads to another important point -- the enduring value of the local. Greenwald and Kahn argue that, despite much ballyhoo to the contrary, local decisions play a significantly greater role in shaping economic destiny than does globalization. For example, they show how decisions within China to open itself to capitalism had much more influence than the ongoing process of globalization. Indeed, the authors demonstrate how local knowledge is tremendously influential in generating higher returns on capital. Think Baidu(NASDAQ:BIDU) versus Google(NASDAQ:GOOG). Thus, companies that operate in their domestic markets perform remarkably better than outsiders do.

Therefore, the companies that are most likely to benefit are those that can enforce local boundaries as a competitive advantage. For example, the book highlights Coca-Cola(NYSE:KO) as a company that has local competitive advantages. Since the company incurs significant fixed costs like distribution, advertising, and sales in each market, it becomes very difficult for a challenger to develop the economies of scale needed to compete. For these reasons, Greenwald and Kahn recommend investing in companies that can use local strengths to insulate themselves against global competition. Service-based economies do this almost by nature, and Foolish investors would be well-advised to look for just such competitive advantages.

One final (macroeconomic) pointThe book also examines the current macroeconomic crisis and its causes. Greenwald and Kahn argue that although the United States is in a potentially better competitive position in regard to globalization, its role as "consumer of last resort" places it in a damaging long-run situation. Given that the United States prints the world's reserve currency and is not so dependent on exports, more dollars flow out of the country than in. As the U.S. current-account deficit spirals, the economic stability of the United States -- and even the world -- becomes imperiled.

Moreover, since many export-dependent developing nations hoard dollars as a reserve against default on their own debt, the United States must be a net debtor nation. Although the actions of these developing nations are self-interestedly rational (at least in the short term), they threaten to topple the global economy.

While recent asset bubbles have temporarily helped to ward off the growing problems of such destabilization, Greenwald and Kahn argue that the best long-term solution for global economic stability is to develop a new reserve currency through a supranational organization, such as the IMF. Such a move, they aver, could eliminate the structural danger inherent to whichever country prints the reserve currency.

Worth a readGreenwald and Kahn challenge much of the conventional knowledge about globalization and offer investors a long-run look into macroeconomic developments. They present intriguing insights based on facts rather than political ideology. That's exactly what Foolish investors want to hear.